Some of Washington's biggest pools of institutional money are boosting their commitment to investments with higher risks and potentially higher returns.

The moves by the Washington state pension fund and the University of Washington are part of a broader trend among institutional investors toward so-called "alternative" investments amid expectations that returns from traditional stock and bond markets will diminish.

Among public pension funds, the $66.3 billion Washington State Investment Board is already one of the top investors in private equity, a higher-risk category that includes buyout, venture capital and distressed debt funds. This month, the fund boosted its private equity allocation from 17 percent to 25 percent.

Also this month, University of Washington regents overseeing the school's $2.1 billion endowment voted to increase its cap on investments in international emerging markets from 15 percent to 25 percent. The emerging markets segment covers investments in Brazil, Russia, India and China.

These investment categories have been good to the state and UW. For the fiscal year ended June 30, the state pension fund produced a private equity return of 28.97 percent, which helped boost the fund's total annual return by 21.33 percent -- its best performance in a decade.

The UW endowment saw a 23.3 percent return last fiscal year, thanks in large part to emerging markets, its best-performing asset class, which generated a 57.9 percent return.

Private equity and emerging markets, which don't have the same history of steady, predictable returns as traditional stocks and bonds, are generally considered higher-risk categories.

In private equity, the risk has been heightened by recent credit market turmoil, which has made debt, the traditional vehicle for most buyout deals, more expensive and difficult to obtain. That has dampened buyout activity for some firms -- and potential payback to shareholders.

But Joseph Dear, executive director of the Washington State Investment Board, said so far the credit-market issues haven't had much impact on the pension fund's private equity investments.

He said the pension fund works with top-performing private equity firms that have proven track records -- names like Kohlberg Kravis Roberts & Co. (KKR), TPG Capital LP, Warburg Pincus LLC and The Blackstone Group. Among the pension fund's investments, Dear could think of only one deal that ran into trouble: KKR's proposed buyout of Harman International Industries Inc.

"Yes, there is more risk with private equity because there is a higher return," Dear said. But he said, "the private equity market works better for generating value."

The pension board's 25 percent allocation in private equity is plus or minus 4 percent, meaning the pension fund could invest up to 29 percent in the category.

Some analysts have expressed concern that emerging markets -- which the UW is targeting -- are being flooded by foreign investors and that those economies may soon overheat. But the university's investment managers say valuations remain attractive and growth continues at a healthy pace.

"The return has been extremely good," said V'Ella Warren, senior vice president for UW finance and facilities and treasurer of the Board of Regents. "We have been rewarded for our willingness to invest in this area."

In 2004, the UW hired Keith Ferguson, a former manager with Fidelity Investments who specialized in overseas investments, as the university's first chief investment officer. Warren says Ferguson's expertise is largely to credit for the UW's strong returns.

The fact that the university raised its allocation for international emerging markets does not mean the UW will suddenly shift more money into the category, Warren said. Instead, the university will allow its current emerging markets holdings to grow beyond the old 15-percent cap.

Warren said the new 25 percent allocation cap for emerging markets is in line with what is considered risk-tolerable by the university. The new cap is temporary and will expire at the end of the current fiscal year, on June 30.

Along with boosting its allocation to private equity, the state pension fund also raised its real estate investment target from 12 percent to 13 percent, and allocated 5 percent to a new category called "tangible assets," which includes funds that are financing huge infrastructure projects such as power plants, bridges and toll roads. The pension fund has already invested in infrastructure funds managed by Alinda Capital Partners LLC and AIG Highstar Capital.

Gerry Langeler, a managing director at OVP Venture Partners, a Kirkland-based venture capital firm, said the pension fund's and UW's high allocation to higher risk "alternative" investments are "unusual but not unprecedented."

"There is a sense that we are entering a period where neither the U.S. stock market or bond market is likely to give us the kinds of returns in the next 10 years that we've gotten in the last 10 or 20. The rates of return won't be as high," said Langeler, whose firm counts the Washington pension fund among its investors.

"The case can be made that the higher-return categories are where you need to be to achieve your overall return," he said.

Langeler said the higher risk can be acceptable for institutional investors that have long-term horizons and don't have heavy liquid cash needs, which allows them ride out short-term volatility.